Leslie Milton, CPA, CA, LPA, Associate Partner
One situation that may present itself in the early years of a newly registered charity relates to directors or members receiving a benefit. For example, an organization may award a grant to a director on the Board who meets all the requirements for the grant. Another example could be appointing an investment advisor, who sits on the Board, to manage the organizations’ investments.
Under section 149(1)(l) of the Income Tax Act , an association is exempt from tax subject to certain criteria if “it does not distribute, or otherwise make available for the personal benefit of a member, any of its income unless the member is an association which has as its primary purpose and function the promotion of amateur athletics in Canada.”
At common law, directors have a duty to avoid conflicts of interest. This includes the appearance of a conflict of interest. The simplest approach is to ensure that no director receives or accepts any personal benefit from a charity.
Directors for charities have a duty to “act gratuitously.” Under the Charities Accounting Act, “a director cannot be paid for services provided in any other capacity unless permitted by a court order.”
However, there are certain instances where an NPO can make payments to members. A common example would be salaries or honorariums. These payments would have to be reasonable and no more than would be paid to an arm’s length party. Reimbursement of reasonable travel or convention expenses would also be acceptable where it is appropriate and consistent with an organization’s goals and objectives for a director to represent the organization at a conference.
Directors’ and officers’ liability insurance could be considered a payment for the benefit of members/directors. The Charities Accounting Act allows the insurance to be purchased subject to certain restrictions. It is important to remember that “an executor, trustee, director or officer cannot be indemnified for liability that relates to their failure to act honestly and in good faith in performing their duties.”
In short, we recommend you consult your legal counsel when determining whether or not to engage one of your existing members. Directors have a duty to be independent, in fact and in appearance, and to ensure they are performing their duties prudently. Separating your heart from your head is of great importance when making these decisions.
